Stablecoin

Stablecoins, different from Bitcoin and other cryptocurrencies, offer price stability, which makes them an important asset in the financial system. For example, while traditional crypto allows borderless payments without intermediaries, its price is highly volatile, as it can swing more than 10% within a few hours (traditional fiat currencies rarely move more than 1% in a single day). As opposed to that, stablecoins link their value to stable assets, such as fiat currencies, which makes them actually possible to use for everyday transactions, not just trading or investing. 

There are three main types of stablecoins:

1. Fiat-collateralized stablecoins are backed by assets like fiat currency, like the US dollar. The issuer holds reserves to support the stablecoin’s value. The reserves are held by independent custodians, who need to undergo regular audits. 
2. Algorithmic stablecoins, which aren’t backed by assets and rely on special algorithms that adjust supply based on demand to keep the price stable. This approach is similar to how central banks manage currency value without backing it. However, algorithmic stablecoins lack legal authority, which makes them vulnerable in terms of dropping value. 
3. Crypto-collateralized stablecoins are backed by cryptocurrencies, which can be volatile. With stablecoins, this makes the value of the reserves greater than the value of the stablecoins issued. The collateral ensures that holders can redeem their tokens for US dollars or other real-world assets (RWAs), helping maintain the stablecoin’s usability. 

Stablecoins maintain their stability and value by pegging their price to an external reference. 

For example:

• By holding reserve assets as collateral (such as commodities like gold).
• By using algorithms that adjust their supply automatically to keep the value steady.

By doing so, stablecoins reduce the risk of volatility that is known to be an issue with crypto like Bitcoin. As a result, stablecoin creates a new token class, which is designed to maintain a steady value. 

Like many regulatory requirements, stablecoins have different rules based on the country. For example, in the US, federal legislation for stablecoins is in progress, and many issuers and stablecoin intermediaries operate under money transmitter laws. Overall, regulators are seeking universal global requirements for stablecoins that would match standards that are now implemented in the financial industry as a way to protect the financial market’s stability. 

No, stablecoin is not Bitcoin. Stablecoins are an alternative to the high volatility of popular cryptocurrencies, such as Bitcoin. Bitcoin’s value can change over short periods. In the meantime, stablecoins maintain a stable value by being tied to other assets like the US dollar.